draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 123However, the main critique of tax havens is not that they force othercountries to cut taxes. It is the perception that these tax havens offeropportunities for tax avoidance or tax evasion to multinational firmsand individual taxpayers residing in other countries, so that other countriessuffer tax revenue losses. One estimate of tax revenue losses becauseof the existence of tax havens has been published by the Tax Justice Network(TJN 2005). TJN starts with estimates of global wealth in financialassets published by banks and consultancy firms (for example, Capgeminiand Merrill Lynch 1998; BCG 2003). This is combined with estimates(for 2004) by the Bank for International Settlements of the share offinancial assets held offshore, though this refers to U.S. asset holdings. 1Based on these numbers, TJN claims that the offshore holdings of financialassets are valued at approximately US$9.5 trillion. This is augmentedby US$2 trillion in nonfinancial wealth held offshore in the form of, forexample, real estate. TJN thus estimates that, globally, approximatelyUS$11.5 trillion in assets are held offshore. Assuming an average returnof 7.5 percent implies that these offshore assets yield US$860 billion.TJN assumes that these assets are taxable at 30 percent and thus calculatesa revenue loss of US$255 billion per year (as of 2005).TJN does not attempt to estimate which part of these revenue lossesoccur in developing countries. Cobham (2005) uses the TJN (2005)results and estimates the share of developing countries. Assuming thatthe 20 percent of worldwide gross domestic product that is accountedfor by middle- and low-income countries represents a credible share ofthe offshore wealth holdings of the developing world, he finds that 20percent of the revenue loss can be assigned to these countries, that is,US$51 billion.Other estimates of these revenue losses use similar methods. Oxfam(2000) calculates the revenue losses caused by the evasion of taxes onincome from financial assets held abroad at around US$15 billion peryear. This result is mainly driven by an estimate of the foreign asset holdingsof residents in developing countries in 1990 (US$700 billion), whichis now outdated. In a more recent study, Oxfam (2009) estimates thatUS$6.2 trillion of developing-country wealth is held offshore by individuals.This leads to an estimated annual tax loss to developing countriesof between US$64 billion and US$124 billion.